Over the course of June the Central Bank of Hungary (CBH) had announced measures to restructure its monetary policy instruments in order to support the refinancing of government debt from domestic forint funding. One of the key elements of the reform is that the two-week deposit facility, which currently serves as the main monetary policy instrument of the Central Bank will be replaced with a new three-month fixed interest rate deposit from 23 September.
Now, as a result of two recently adopted decrees of the Central Bank, the reliance of the domestic banking sector on external funding - as a key important factor from a financial stability perspective - is being reduced, by tightening the foreign exchange funding adequacy ratio (FFAR) and by introducing the foreign exchange coverage ratio (FECR) to the market. The Central Bank expects that the vulnerability of the banking sector and thereby that of the economy can be further reduced.
The Financial Stability Board of the CBH adopted the decrees on the changes to the foreign exchange funding adequacy ratio (FFAR) and on the introduction of the foreign exchange coverage ratio (FECR) on 7 July. The decrees will enter into effect on 1 January 2016.
After 1 January 2016 outstanding swaps can no longer be included in the FFAR ratio and the required level of the FFAR will be raised to 100%. The new FECR regulation will limit the on-balance sheet currency mismatch at 15% of the balance sheet total, thereby reducing banks’ reliance on the swap market.
As a result of the new regulations, the short-term external debt of the banking sector is expected to fall by EUR 2–3 billion to EUR 6–7 billion by the end of the 2016.
Contact:
Gabriella Kopházi-Tóth
Senior Relationship Manager
Global Securities Services Hungary
gabriella.toth@unicreditgroup.hu